How Do Sports Betting Sites Make Money?

Since the explosive success of Sportpesain Kenya, quite a number of similar sports betting sites have been recently launched to take advantage of the current gambling craze. My quick estimates show that there are more than 10 similar websites registered and operating locally. Suffice it to say that online gambling is one of the most profitable e-Businesses. William Hill, the biggest sports betting company, generated a revenue of $2.5billion in 2014. But, how do they make money?

Key terms to understand first.

Bookie/Bookmaker – The person who takes the wages on sporting events e.g. Sportpesa

Odds/Lines – Usually presented in decimal points (1.80) or as a fraction (UK format) to show the potential winnings against a stake.

Probability – is a type of ratio where we attempt to predict how many times an outcome can occur compared to all possible outcomes.

Better – The gambler placing the bets

Off the Board – A game that the bookie is not accepting bets on.

A lot of people believe that sports betting sites only depend on the unexpected outcome of matchesto make a profit e.g. A team in position 1 losing to the last team on the table. However, this assumption is mostly untrue and all bets will often guarantee the bookie a profit irrespective of the result. Just like in a casino where the games are skewed to ensure the house always wins, sports betting sites use simple mathematics to ensure their success in the longrun.

Some bookies usually reduce their liability, by placing opposing bets with other bookmakers. For example, Elitebet Kenya might notice that a week’s matches have very high lines, and a majority of their users have placed bets on the favorites, in a bid to minimize losses they will place opposing bets with Sportpesa especially when they are offering higher odds.

Every major sports betting company has a group of analysts called odd compilers or risk analysts who determine the actual probability of the three outcomes (winA, Draw, WinB) of a match occurring by factoring in the following:

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Let us use a hypothetical match between Manchester United and Arsenal FC at Old Trafford. As a linemaker I can comfortably make the following predictions.

2.75

Man Utd

36.36% chance of winning

3.60

Draw

27.7% chance of occurring

2.75

Arsenal FC.

36.36% chance of winning

How did I come up with these odds? Man Utd has the home and referee advantage, and historically win more matches against Arsenal; however, their current form is very poor and they are missing key players. On the other hand, Arsenal FC are on a winning streak, Ozil is playing exceptionally well, but they have too many injuries and tend to lose too many crucial matches at this time in the season.

This totals to about 100% and in a ‘perfect market’ if the bookie offers these odds they are bound to break even (make as much money as they are losing i.e. zero profit or loss) in the long run. However, this is a business and they have to skew the odds in their favor. Bookies usually lower the betting odds depending on their target profit margin.

With a profit margin that is ~10% the total odds offered by the bookie should be close to:

2.50

Man Utd

40% chance of winning

3.40

Draw

29.4% chance of occurring

2.50

Arsenal FC.

40% chance of winning

These odds do not add up to 100%, and this is where the sports betting sites primarily make their profit. With a 10% profit margin, the bookie expects to make about Sh10 profit for every Sh100 bet placed. However, the initial odds offered by bookies are wildly inaccurate and they are adjusted throughout the period before the match to account for competitor activity and the bets placed by other users, which is why it is advisable to bet early. In our hypothetical match the odds are bound to change in favor of the team receiving the least bets. In this case, Arsenal will be the user favorite due to their current season form and their odd will drop to about 1.7 while that of Man Utd will increase to 2.9/3.0.

However, keep in mind that people often bet on the favorites e.g Arsenal, Chelsea, Manchester United and the most money is made when they fail to perform, and judging by the current season the Bookies must be raking in millions.